All you need to know about Fat, Fat32, and NTFS during installation

On Microsoft's Professional exam you'll need to know when to
use FAT, FAT32, and NTFS. It is important to remember that Microsoft advises (a.k.a.
better pick this answer) that you always choose NTFS unless you will
be dual-booting with an additional operating system like Windows
9x. Remember that FAT and FAT32 offer no file level security like in NTFS. And unlike FAT,
NTFS also offers disk compression, disk quotas, and file
encryption. When faced with a question asking either a) which file system should you choose
if you want file encryption and disk compression or b) Which file
system should you choose to dual boot, make sure you know the
differences listed above and choose the appropriate answer.

On Microsoft's Professional exam you'll need to know when to
use FAT, FAT32, and NTFS.

If you decide to use FAT or FAT32, setup
will decide how the partition is formatted by looking at the size of
that partition. A
partition smaller than 2 GB will be partitioned as FAT, while one
bigger than that will be setup as FAT32. If you require a dual boot
scenario, only the system partition has to be FAT or FAT32, and all
other drives can be NTFS. (On a side note, Windows 2000 can be installed on a 4
GB FAT partition. However, this can only be done in W2K and not in DOS.)

Additionally, you can convert from FAT
to NTFS at any time by using the convert utility at the command
prompt, and the data on the drive will be preserved. You cannot change back from
NTFS to FAT without data loss.